Defense and Civilian Deals to Offer Significant Upside

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  • Defense and Civilian Deals to Offer Significant

    Upside

    Alexium International Group Limited (AJX), an Australian company with its principal

    commercial activities located in the United States, is engaged in the commercialization of

    Reactive Surface Treatment (RST) technology. The technology involves binding

    commercially available silanes, which are compounds of silicon and hydrogen, to various

    surfaces through microwave energy. RST has a wide range of potential applications in

    textiles (military, technical textiles, medical textiles and multi-functional upholstery/furnishing

    treatments); air/fluid filters; industrial coatings; composite fibers; leather; and glass. The

    technology was initially developed by the US Department of Defense (DoD) in order to

    enhance the performance of specialist garments used to provide protection against

    Chemical, Biological, Radiological or Nuclear (CBRN) threats. The companys strong

    relationship with the DoD holds it in good stead to garner contracts under UIPE I1, JFIRE

    and JSLIST programs to provide protective suits for military personnel. Although initially the

    programs will lead to a combined annual revenue generation of ~US$37.5 million, the

    upside to revenues will be significant once the DoD fully adopts the technology as a

    standard. This would then open the door to the US military textiles market (worth ~US$2.4

    billion) as well as the defense markets in allied countries.

    Alexium is also actively pursuing partnerships and licensing deals to further commercialize

    the versatile RST technology. The company has tied up with US-based ITG Inc., a major

    global fabric manufacturer, to jointly exploit global opportunities in the defense and civilian

    markets. Moreover, Alexium has also entered into an agreement with Bruck Textiles to offer

    RST technology-based products for Australasia and with SSM Industries to apply RST

    technology for NASCARs personal protection apparel.

    Further, Alexiums future joint development of RST with the DoD to expand applications of

    the technology, which could lead to additional revenue streams and also help keep

    expenditures related to technology development under control. With a promising pipeline of

    defense contracts and civilian deals, we believe that moving forward the company is primed

    to witness a high-growth phase in revenue, margins and profitability.

    We have valued Alexium on a Discounted Cash Flow (DCF) basis and initiate coverage with

    a target price of A$0.391/share, an upside of 291.1% from the last traded price of

    A$0.100/share.

    Investment Arguments

    Strong Revenue Potential from Defense Deals. Alexiums RST technology is being

    evaluated by the DoD under various contracts for the development of new multi-

    functional CBRN protective suits. The contracts will lead to a strong and steady stream

    of revenues starting from FY12. The company has submitted a joint bid for the supply

    of lightweight CBRN suits under the UIPE I1 contract, worth US$129 million. If

    awarded, the contract will result in corresponding revenue of US$27 million to Alexium

    over three years at full production rate. Further, under the JFIRE program, Alexium

    expects revenue to start coming in after 2012, and once awarded the companys

    revenue share is expected to be ~US$500,000 for each contract year while under the

    JSLIST program, annual revenue potential is ~US$10 million. Moreover, since CBRN

    suits have a limited shelf-life and need to be replaced periodically, we believe this will

    create a billion dollar market opportunity (annual budget for the US military textiles is

    Price (A$): 0.100

    Target Price (A$): 0.391

    Beta: 1.10

    Price/Book Ratio: 1.15

    Debt/Equity Ratio: 0.00

    Listed Exchange: ASX

    Recent News

    20/04/2011: Alexium submits US$129 million

    bid to US DoD with Tennier Industries

    28/03/2011: Alexium enters into collaborative

    agreement (MoU) with ITG

    24/03/2011: Announces US$8 million three-

    year funding commitment from Roswell

    Capital Partners LLC, USA

    03/03/2011: Signs MoU with Bruck Textiles

    Pty Limited to market and distribute products

    in Australia and New Zealand

    16/02/2011: Extends cooperative R&D

    Agreement (CRADA) with the US Air Force

    14/02/2011: Alexium and Steadfast Inc.

    execute teaming agreement

    Shares in Issue

    107.87 M

    Market Cap

    (A$M) 10.79

    52 Week (High): A$0.195

    52 Week (Low): A$0.080

    Alexium International Group Limited

    (Ticker: ASX:AJX)

    May 19, 2011

    www.RBMILESTONE.com

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    Equity Research and Market Intelligence

  • 2

    ~US$2.4 billion). In addition, ballistic fabric treatment also represents a large revenue

    opportunity for the company as the market is estimated to be ~US$10-15 million

    annually in the US alone.

    Civilian Opportunities Offer Significant Growth Prospects. Alexium is taking

    initiatives to commercialize RST technology in the civilian space and is looking for

    opportunities in textiles, filters and paints. In textiles, Alexium is aiming for higher-end

    market segments such as cashmere, medical textiles and dressings. The company has

    undergone initial trials which have demonstrated the technologys significant advantage

    over conventional technologies in terms of performance and cost savings. Paints are

    another area where RST would offer significant growth prospects by offering solutions

    such as anti-graffiti; biocidal/anti-microbial; corrosion resistance; and marine and

    aviation coatings. Filters used for industrial or automotive applications also represent a

    lucrative opportunity as the market is expected to reach ~US$49 billion in 2011. Water,

    oil, diesel and air filters typically require a robust surface functionality which can be

    achieved using RST technology. Further, we believe that Alexiums credentials and

    experience in the CBRN market would enable the company to get a foothold in the first

    responder (police, paramedics, etc.) market as well

    RST Enhances Conventional Technologies. Currently, there are a wide range of

    specialist textiles commercially available in the market. For example DuPont produces

    high performance aramid textiles, while companies such as Gore Tex make specialist

    breathable membranes integrated into high performance garments. However, the key

    advantage of RST technology is that it can be used to add new or enhance the

    properties of a wide range of textiles ranging from cotton to high performance synthetic

    fibers which, if properly exploited, would open up significant revenue generating options

    for Alexium. The key to the Alexium RST process is the ability to use the unit to apply

    lightweight, durable, nanoscopic coatings on to a textile fiber. These coatings may

    incorporate a wide range of functions including water/oil repellence, flame retardants,

    antimicrobials or as a combination of each for CBRN textiles. Treatments may be

    applied on a continuous reel to reel basis, and incorporated with existing production

    techniques, a necessity for the textile industry.

    Product Development Efforts to Unlock Additional Revenue Drivers. Alexium has

    entered into agreements with leading textile manufacturers to develop innovative

    products for a wide range of markets. The company has partnered with ITG, a major

    global textile manufacturer, to jointly exploit opportunities in defense and civilian

    markets. Further, Alexium has recently extended its ongoing Cooperative Research

    and Development Agreement (CRADA) with the US Air Force to develop new defense

    and civilian products and augment the patent portfolio. Although there is a gestation

    period involved for new RST-based applications to achieve full commercialization, we

    believe that adoption of the technology by the DoD after successful field trials would

    unveil significant market opportunities for Alexium to tap into

    Valuation. As Alexium is still in the initial phases of corporate development, its share

    price has decreased from A$0.140 on May 7, 2010 to A$0.100 at present. The

    company is currently trading at EV/EBITDA multiple of 1.2x for FY13E. Our DCF-based

    valuation model gives us a price target of A$0.391 with a potential upside of 291.1%.

    We believe that the stock is attractively priced at current levels with a significant upside

    potential

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    Alexium International Group Limited

    Company Overview

    Introduction

    Alexium International Group Limited, previously known as ETW Corporation Limited, was

    formed in Perth, Western Australia in May 2007 with the sole purpose of acquiring global

    intellectual property (IP) rights to RST technology. RST is a grafting technology developed

    jointly by the research division of the US Air Force (USAF) and the US DoD to enhance

    protection of its personnel against CBRN threats. The DoD holds the US patent rights for

    RST, but has given its exclusive US license, as well as the right to file for patents in other